Review Hails Successes of IMF's Safeguards Assessments

A recent review by the IMF Executive Board examined a decade of experience under the IMF’s “safeguards assessment” policy, based on assessments by both Fund staff and an independent panel of experts.

Safeguards assessments were introduced in mid-2000 as a complement to the IMF’s traditional safeguards mechanisms, such as conditionality and program design. Conducted for member countries that access Fund finances, these assessments are a diagnostic review of the adequacy of a central bank’s audit, reporting, and control mechanisms.

In this interview, two senior officials from the IMF’s Finance Department—Director Andrew Tweedie and Assistant Director Chris Hemus—together with the chair of the independent review panel, Lynn Turner, discuss the outcomes of the review, including the benefits for the Fund and member country central banks, plus expected improvements in the policy.

IMF Survey online: What did the review of the Safeguards Assessment Policy set out to achieve?

TWEEDIE: The main aim of the review was to take stock of the safeguards policy, make sure it’s still achieving its goals, and look for possible areas where we could enhance the policy. The policy is now 10 years old and a lot has happened in the past decade. The policy has matured, and there have also been a lot of advances in central bank audit and control practices, so it is a timely opportunity to step back and make sure the policy is still achieving its goals.

IMF Survey online: What was the role of the independent panel?

TWEEDIE: We involved an independent expert panel at the inception of the policy and in each of the three reviews. The panel brings a valuable outside perspective and, importantly, as the safeguards reports themselves are kept confidential, the panel helps provide assurances that the policy has been effective. We were very fortunate with this review to have a very distinguished panel.

TURNER: The panel provides an independent view that gives a greater degree of confidence in the program to the Board and serves to confirm what the staff is recommending, to the extent that we agreed. In this case, there was a lot of agreement between the panel and Fund staff about the program’s successes, as well as how to continually improve the program.

An outside panel also helps in reaching out to stakeholders. They feel reassured that there really is an independent perspective. Our panel found the stakeholders—from within the Fund and from other institutions, including a number of central banks and the big four accounting firms—very willing to share their perspectives. So, it was a fairly broad outreach program and we were very fortunate to get some very good ideas from all those people.

IMF Survey online: What were the main messages coming out of the review?

TWEEDIE: There was a strong endorsement by the Board of the effectiveness of the policy. The Safeguards Assessment Program is seen as an important element of the due diligence process in the Fund’s lending, and as being effective in mitigating the risks of misreporting and misuse of the Fund’s resources. Of course, it was recognized that the assessments themselves are not a guarantee and issues can still arise.

"We heard from the central banks themselves that the safeguards program had strengthened their discipline and procedures."

Looking ahead, the review identified several areas where we can do more. First, while the broad framework remains appropriate, there was a sense we could increase the focus on the areas of governance and risk management in central banks. Second, the Board agreed that safeguards reports should remain confidential, but that Fund staff should do more to disseminate the results, including cross-country experience. Third, the Board endorsed an approach that helps to ensure that, in cases where the Fund provides budget financing, there is a clear framework in place that establishes relationships between the central bank and government so that the responsibilities—including for making repayments to the Fund—are clear.

TURNER: From stakeholders, the panel pretty much heard unanimous agreement that the program was successful, and especially from the central bankers that the program really helped enhance their institutions, and so they were very supportive of the program.

IMF Survey online: Beyond the broader benefits for the institution and its membership, what are the main benefits for countries that have had safeguards assessments?

TURNER: We heard from the central banks themselves that the safeguards program had strengthened their discipline and procedures to provide greater control and integrity of their own processes. They all found the framework extremely helpful. We also heard that the input that they’d received from Fund staff had helped in a number of areas, including their internal audit programs, as well as various aspects of their audit committees. Finally, from the panel’s perspective, the efforts to ensure that real independent outside audits are performed at these central banks was also very helpful in the overall process.

HEMUS: I have seen first hand how central banks have embraced the policy and see benefits for themselves. I remember being on a safeguards mission in the early days and the team met with the governor of a fairly large central bank. The first thing he said was, “I’m so happy you are here, because I’ve been trying to get endorsements from my board and the government to establish an internal audit department, and I just haven’t been able to, and your assessment is going to be the catalyst for change.”

TWEEDIE: Something that impressed me in the course of the review was the sense that central banks find this a very valuable exercise. They would like to know more about what other central banks are doing and what is best practice in these areas, and particularly welcome opportunities to share their experiences at the periodic seminars conducted by the Fund on financial safeguards.

"Central banks would like to know more about what other central banks are doing and what is best practice in these areas."

Of course, the program is not technical assistance—it is part of the Fund’s due diligence to protect the Fund against the risk of misuse and misreporting with Fund’s lending—but the value to central banks is a very important side benefit. It’s an area where the Fund gains, but also the participating central banks gain.

IMF Survey online: Mr. Turner, as a member of the original panel, what do you see as the key successes or progress in the Safeguards Assessment Policy to date?

TURNER: I was especially pleased that the IMF has become so supportive of the safeguards program and has done such a good job of incorporating it into its operations. When the original panel looked at this issue 10 years ago, there was some pushback against engaging in such a program, and there was the possibility that it wouldn’t be well embraced. However, it’s turned out to be just the opposite—it has been overwhelmingly embraced and is considered by all participants as a very worthwhile and valuable process. Also, the Fund’s efforts to evaluate the program and look periodically at how to improve it further is another indication of a well managed program.

IMF Survey online: Continuous change and improvement is a theme you have all touched on. What are the main ways in which the policy has evolved since its inception and the main changes coming out of this review?

TURNER: The original panel made some very fundamental recommendations with respect to internal controls, internal audits, and independent audits. But Fund staff have taken those initial ideas and really created and built a very strong framework that implements those ideas and administers them in a way that the objectives of the safeguards program really are achieved. The panel also found that the various tools being used to carry out the safeguards assessments are very good and have contributed to the success of the program.

Going forward, the panel had a perspective of “Things don’t change overnight,” so our recommendations focused more on the importance of continuous improvement. As Mr. Tweedie mentioned earlier, we thought there could be improvements in the way the program incorporates governance and risk management, and accounts for increased budgetary support by the Fund. We also would hope that, over the next 10 years, transparency around the program can be enhanced.

HEMUS: Mr. Tweedie and Mr. Turner already mentioned the need for the safeguards policy to adapt to the increasing number of cases of direct budget financing by the Fund. Here, the Board endorsed two new elements for safeguards assessments.

One aspect that Mr. Tweedie already mentioned are plans to formalize existing practices associated with direct budget support. In these cases we would ensure that framework agreements that replicate indirect budget support, where the central bank onlends IMF resources to the government, are established as a standard part of all lending arrangements.

The other proposal the Board supported was to draw on the multiplicity of existing diagnostic reports—such as the IMF’s fiscal Reports on the Observance of Standards and Codes, Public Expenditure and Financial Accountability reports done by various agencies, and the World Bank’s financial accountability assessments—to flag fiscal safeguards risks and, if necessary, propose actions to address these at the time the Board approves a new program.

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